I had always assumed that Bitcoin was like Paypal. You put real currency into an account so that you can use it to buy things easily. It’s like an ATM card with a Mastercard or Visa logo. Only, it’s not.

Bitcoin is actually an entirely separate form of currency. It’s the digital equivalent of using Monopoly money to pay for your meal. It’s not minted or backed by any one country. And though we need to compare it to our native currency just to keep our brains on straight, it actually has no relationship to almighty dollar. . .or the Euro or the British Pound.

Sort of. . here’s where it gets fuzzy for me.

Instead of printing money to represent the amount of gold in Fort Knox, Bitcoins are “mined” by “miners” who are just ab0ve-average Joes with a lot of computer memory to spare.

Here’s how it works:

(Correct me if I’m wrong, because after an hour of reading up on this, I could be.)

I start out by buying Bitcoins with actual US dollars from someone who has Bitcoins to sell. You can find people on sites like LocaleBitcoins.com. If I’m reading this right, I need to hand over $700+ dollars to a stranger to get my coins. (hmmmm). Once I have Bitcoins, I can spend them anywhere that accepts them. There’s a map for that.

In my neighborhood, I can use Bitcoins to buy weatherproofing or a Lamborghini. If I want food, I’ll have to drive into Los Angeles where I can also get hypnotized and my nails done.

When I pay, the “miners” go to work. They subtract the price from my balance sheet and add the amount to the seller’s balance sheet. It can take up to 10 minutes and the miner earns Bitcoin for his trouble. Apparently, there was a time when you could make beaucoup bucks in your sleep mining Bitcoin from home but not so much anymore.

This is where it gets foggy for me. How does the seller get paid for his Bitcoin transaction? I suppose he can spend the Bitcoin on things he needs, but there aren’t that many places that accept it so. . . I guess he can sell his coin to someone else to get the money to pay the electric bill?

It all sounds very rickety, doesn’t it? So why bother?

Pro and Con

For merchants, the upside is that they get to keep more of the money. It only costs about 1% to process a Bitcoin transaction compared to 3.5% for a credit card. And since Bitcoin is like cash, the customer can’t refuse to pay later and cause a chargeback.

The best reason to accept Bitcoin, is to attract new customers. Diehard Bitcoiners will go out of their way to shop or eat in an establishment that accepts the virtual coinage. There are websites and meet-ups groups that will happily promote your business and the way the journalists are gobbling up the story, you could end up as the top story on tomorrow’s news.

The downside is that a very small percentage of the population uses Bitcoin, especially here in the US. It appears to be much more popular in other parts of the world. And if you travel from country to country, it’s a great way to avoid the issues of currency exchange. Also, Bitcoin values are fluctuating like crazy, this makes it hard to set reasonable prices for items.

The biggest downside is the instability of the system. Bitcoin advocates will tell you it’s solid, but there are just as many stories that will tell you no. Because Bitcoin is an untraceable form of currency, it’s often used for illegal transactions. That means the legal system is involved. Remember what happened with online gambling in the US? Here today, gone tomorrow because of money laundering concerns.

Will Bitcom survive? Too early to tell. But if you run a business in a busy metropolitan area, it might be worth trying. A Bitcoin Accepted Here sign could lead to a whole new revenue stream.

To accept bitcoins is actually completely free – the merchants being charged 1% are using a service that converts their bitcoins into dollars immediately.
For them they have no need to concern themselves about volatitlity as they just get the dollars minus 1% (coinbase does it for 0% for the first million dollars)
From their perspective it’s just a much cheaper way of getting paid.

Jason

“It’s the digital equivalent of using Monopoly money”

Sorry, Cindy, you still have no idea what bitcoin is.

Bitcoin’s value is both in it’s expected utility as a currency, but also in the blockchain’s value for any other purpose that involves getting a group of people who don’t trust each other to reach a consensus. It’s an effective solution to the Byzantine General’s problem.

For all you bit coiners gung-ho and what could go wrong attitude, and wow its all anonymous well read it and weep. “Bitcoin users have become the hot target for cybercriminals as bitcoin transaction is permanent and has no reversal of charges,” Trend Micro managing director (India & SAARC) Dhanya Thakkar said.

About 12,000 personal computers have been globally affected by malwares (related to bitcoin) which were causing severe slowdown of computer systems making them “virtual assets for the criminals,” it added.

“Although bitcoin is claimed to be anonymous, the transaction records are still in public and it leave traces… Consequently, given enough circumstantial evidence, criminals can identify and obtain the owners personal information,” Trend Micro said.

Thakkar noted that there is no regulator or authority that bitcoin users can appeal to if they fall victim to theft or fraud.

You are absolutely right that there are not that many people right now using Bitcoin. However, the number of people using them is growing at an exponential rate. It’s like the internet. At the beginning, it was only a few “above average joes” using them, and now it is difficult to get by without using the internet. In five years, most people will be using Bitcoin and hundreds of off-shoot applications that we haven’t even thought of yet will come on line. Start accepting Bitcoin now and you can get known as a business that accepts; when the usage curve takes off, you will find yourself on the top of the wave.

Visit Bitcoinwarrior.net to learn more.

Milly Bitcoin

If you look at software downloads, nodes, merchant adoption, transactions, etc.. it is closer to linear growth, not exponential. Bitcoin is still experimental and there is currently a limit of about 7 transactions per second. Changes are being implanted but exponential growth would be a problem if it happens too quickly.

Mintz

“It’s the digital equivalent of using Monopoly money to pay for your meal.”

To be fair, she doesn’t fully understand Bitcoin and is simply writing a blog about her interest in it.
She admits ‘she could be wrong’.
Most people don’t understand it, because it really is difficult to understand.
No need to stop reading though – I personally found the article interesting.

John Hacking

Cash is also used for illegal transactions, should we stop using cash? Best way to learn about Bitcoin is to risk some dollars or time and give it a go. You can buy them, or mine them. It costs nothing but time to start out. Yes, the price of Bitcoin goes up and down, like most currencies and commodities.

JE Bailey

It can definitely be confusing for someone who is first running across this. The first part to understand is that there are exchanges where people buy/sell bitcoins in a marketplace. A bitcoin exchange is similar to other forms of exchanges like the stock market, and you can either have an account directly at an exchange, http://www.bitstamp.net, is one. Or you could deal with another service that interacts with the exchange on your behalf.

As a merchant, I would use a merchant service, provided by a recognized company like bitpay or coinbase (bitpay.com and coinbase.com) respectively. They would handle the transaction for me, and the majority of vendors then have the coin converted directly to the local currency and then deposited to their account.

So the question is, “why bother?” It comes down to the problems with credit cards. You’ve probably walked into a store and seen a sign that says “credit/debit purchases $5.00 or more” or similar. The reason for this is that the percentage fee that credit card companies transaction fee can range up to 3.5% with a per transaction cost of up to 10 cents. With low cost items, this can bite into the sellers actual cost, with them ending up selling it at a lost. In addition it can take up to 72 hours for the merchant to actually get the money from the credit card company and if the purchaser later claims fraud, the money can be pulled back out of your account weeks later.

With bitcoins, transaction fees are actually managed by the purchaser, which are tacked on top of the sales price, meaning that the merchant could get up to 100% of their sale price. I say could, because merchant services do add per transaction fees, but at a fraction of the comparable credit card transaction fee.